Under NI 81-102, an investment fund must adhere to certain restrictions regarding its investment portfolio. A financial advisor is explaining to a client why a specific mutual fund cannot hold more than 10% of its net asset value in the securities of a single issuer, except for government securities. What is the primary purpose of this restriction?

Question: Under NI 81-102, an investment fund must adhere to certain restrictions regarding its investment portfolio. A financial advisor is explaining to a client why a specific mutual fund cannot hold more than 10% of its net asset value in the securities of a single issuer, except for government securities. What is the primary purpose of this restriction?

Answer options:

• To ensure the fund's liquidity meets redemption demands. ✅ To prevent excessive concentration risk within the fund's holdings.
• To simplify the calculation of the fund's Net Asset Value (NAV).
• To limit the fund's exposure to foreign currency fluctuations.

Correct answer: To prevent excessive concentration risk within the fund's holdings.

Explanation: The diversification requirements outlined in NI 81-102, such as the 10% limit on single-issuer exposure (excluding government securities), are primarily designed to prevent excessive concentration risk. This helps protect investors by ensuring the fund's performance is not overly reliant on the fortunes of one particular company.